ConstructionRisk Report (April 2025)

Inside this Issue

• A1 - Contractor Forfeited Right to Indemnity from Insurance Carrier
• A2 - One-sided Arbitration Clause Unenforceable

Article 1

Contractor Forfeited Right to Indemnity from Insurance Carrier

See similar articles: Insurance Dispute | Notice of Claim | Proof of Damages

Where Insured contractor settled a claim against it by its owner client, the insurance carrier declined to cover the settlement as “damages”.  In a lawsuit against the carrier by the contractor, a court found the carrier had no duty to indemnify the contractor for the $24 million settlement because (1) the contractor failed to provide timely notice of the claim the Owner made against it, (2) the contractor failed to sufficiently prove that the claims were covered by the insurance policy, (3) the contractor failed to show that the carrier breached its duty to act with good faith and fair dealing.  St. Paul Fire and Marime Insurance Co. v. Hitt Contracting, Inc., 2024 WL 5125400 (Va, Cir. Ct, 2024) (Trial Order).

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On December 12, 2024, the Circuit Court of Virginia for Fairfax County ruled in favor of St. Paul Fire and Marine Insurance Company in a dispute against Hitt Contracting Inc.

The case centered on whether St. Paul breached its insurance contract by not indemnifying Hitt for $24 million towards a settlement Hitt made with its customer, Glenstone.

The court's decision, delivered by the Hon. David A. Oblon, found that Hitt failed to provide St. Paul with timely notice of a likely insurance claim, thus forfeiting coverage.
Here's a summary of the key points:

* The Underlying Dispute: Hitt Contracting was sued by Glenstone for $35.9 million due to alleged problems with Hitt's work on a construction project. Hitt had a three-layer insurance policy, with St. Paul providing the second-layer excess policy for $25 million.

* Delayed Notification: Despite the significant counterclaim, Hitt did not notify St. Paul of the potential claim until five months after being served, and only after an unsuccessful mediation with Glenstone.

* St. Paul's Denial: St. Paul denied coverage due to the delayed notification. Hitt eventually settled with Glenstone for $51 million and sought coverage from St. Paul.

* The Court's Ruling: The court focused on the "reasonable notice" provision implied in the insurance contract. It concluded that Hitt's five-month delay in notifying St. Paul, especially after engaging in unsuccessful mediation, was unreasonable and prejudiced St. Paul. This delay made it impossible to know if St. Paul's involvement earlier could have affected the settlement negotiations.

* Breach of Contract Claim: Hitt counterclaimed against St. Paul for breach of contract. The court ruled that St. Paul did not breach the contract because Hitt's failure to provide timely notice barred the coverage claim. In essence, the court reinforced the importance of contractors promptly notifying their insurers of potential claims. The decision highlights that even without a specific deadline in the policy, "reasonable notice" is required once the likelihood of a claim arises, and unreasonable delays can result in the waiver of coverage.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 27, No. 3 (April 2025).

Copyright 2025, ConstructionRisk, LLC

Article 2

One-sided Arbitration Clause Unenforceable

See similar articles: Arbitration | one-sided

An arbitration clause that gave one party sole discretion in deciding whether to arbitrate a claim was unenforceable.  A district court granted contractor’s motion to compel arbitation but this was reversed on appeal because of the one-sided nature of the clause rendering it “substantively unconscionable.” The question was whether the provision was fair and reasonable.  Atlas Electrical Construction, Inc. v. Flintco, LLC,550 P.3d 881 (New Mexico, 2024).

(Text from Google Gemini)

On March 18, 2024, the Court of Appeals of New Mexico issued a decision in the case of Atlas Electrical Construction, Inc. v. Flintco, LLC, reported at 550 P.3d 881. The court reversed the district court's decision to compel arbitration and stay proceedings in Atlas Electrical's breach of contract claim against Flintco.

The central issue on appeal was whether the arbitration provision in the subcontract between Atlas Electrical and Flintco was substantively unconscionable and therefore unenforceable. The arbitration clause in question gave Flintco, at its sole discretion, the option to choose between arbitration or litigation to resolve any disputes arising under the subcontract.

The Court of Appeals concluded that this provision was indeed substantively unconscionable. The court reasoned that the clause was facially one-sided, granting only Flintco the power to decide the forum for dispute resolution. This lack of mutuality and the unilateral control over the dispute resolution process rendered the arbitration agreement substantively unfair.

Therefore, the Court of Appeals held that the arbitration provision was unenforceable, reversed the district court's order compelling arbitration, and remanded the case for further proceedings on Atlas Electrical's breach of contract claim.

Risk Management Comment:  ConstructionRisk, LLC, when reviewing and redlining contracts for our clients, routinely strikes out the arbitration clause entirely and replaces it with litigation of disputes in the state in which the project is located.  It has been our experience that litigation is preferable for a number of reasons.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 27, No. 3 (April 2025).

Copyright 2025, ConstructionRisk, LLC